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Transit Secrets: Learning From Hong Kong

Alex Marshall / Aug 05 2011

For Release Friday, August 5, 2011

Alex MarshallThere is really no denying that transportation makes money. Just consider the huge shopping malls perched around interstate off-ramps, the office parks positioned close to airports, the skyscrapers next to subway stations.

But transportation itself is usually a money loser. We pour billions of public dollars into highways, airports and transit systems, while others, the home builders, the department store mavens, make the money that comes slows from those public investments.

Hong Kong’s metro system, MTR, has changed this equation, and that is why it’s worth looking at.

If you are ever lucky enough to visit Hong Kong, which is Manhattan-like with its narrow streets lined with high rises, you will see that the MTR’s services are excellent. You may ride the gleaming new high-speed rail line from the new airport that takes you into the new central rail station. Or one of the nine rail and subway lines, including the special train that goes to Disneyland Hong Kong.

What’s amazing about the agency that runs these lines, MTR, is that it actually makes money. So much money that it’s listed on the stock exchange, although the government still owns a majority share.

The Hong Kong’s metro system has been in the news in the New York city region because the chief of New York City’s transit agency, the Metropolitan Transportation Authority, shocked the region by announcing his departure to lead Hong Kong’s system for a million-dollar plus annual salary. He left at a particularly bad time, breaking a seven year contract just as the MTA was facing yet another round of funding gaps and necessary cuts.

Given the perennial money-losing nature of most transportation departments, from highways to rail, it bears asking: how does Hong Kong do it?

The answer is that Hong Kong’s MTR doesn’t let private developers be the only ones that perch next to its stations. It builds its homes, offices and stores. In short, MTR acts as a real estate developer and business company, as well as a train operator. It owns, among other things, 12 shopping malls built around its stations. These properties and businesses produce substantial cash, which keep the transit agency as a whole in the black.

Hong Kong’s MTR is unusual in also actually making money from its fares as well. How it can do this relates in part the uniqueness of running trains on an intense few strips of land filled with development. But for our purposes it’s worth looking at its actions as a developer, and that as a model for transportation agencies and departments in this country.

By many standards, MTR is an unusual company.

The MTR only began service in 1979. But once cash was flowing (through development around stations), the government “graduated” MTR to become a private company, still majority owned by government, so that it could raise funding through capital markets and more nimbly enter into joint ventures with private investors.

In 2000, the Hong Kong government converted the public MTRC into the private MTR Corporation Limited (MTRCL), although the government maintains a majority stake. Shares are traded on the Hong Kong stock exchange. WIkipedia reports that MTR also invests in railways in different parts in the world, and has obtained contracts to operate rapid-transit systems in London, Stockholm, Beijing, Shenzhen, and Melbourne.

Could transit and highway departments in the United States ever do something equally innovative? Why shouldn’t a highway department make money on the shopping malls built around its exits? Shouldn’t it at least get a cut?

While it may seem extraordinary to have a transit company operating like a profit-making company, it’s not novel. A century ago private streetcar lines made money more on the homes and shops built around their tracks, on company-owned land, than the nickel fares they received.

While retaining public control of vital infrastructure systems — a crucial point — governments can facilitate new versions of these old arrangements.

Let me be clear here. I don’t want the transit agencies or highway departments to be only concerned with making a profit for their shareholders, which is how private businesses act. I want them to make a profit for the public, so that roads can be maintained well, taxes and fares kept down.

It’s a long way from anywhere in the United States to Hong Kong, but there’s no reason we can’t learn from it.

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  1. Posted August 6, 2011 at 8:36 am | Permalink

    This is a brilliant idea that brings us back to how things used to be done in the good old days. Here in New England many of the old trolley lines were built by private sector companies who then developed the neighborhoods alongside them. They even developed amusement parks that allowed the trolley companies to gather patrons for Saturday and Sunday traffic.

    However, let’s expand this idea to be more than just this light rail. Lets get rid of Amtrak and make it work like it used to when passenger rail was successful. Give it back to the private sector railroads and make them put the mail back on the passenger trains and put the expedited parcel business back on the passenger trains too. Doing both of these things will make passenger rail profitable again.

    And while we’re thinking about it, does anyone in their right mind think it is good policy to allow Amtrak’s budget to be controlled by the whims of Congress? With the renegade anarchists [tea-partiers] there, nothing will be working at the federal level. It is time to get rid of Amtrak.

  2. Eugene Chan
    Posted August 7, 2011 at 11:02 am | Permalink

    Interesting article. But you miss two very important pieces of detail. First, a transportation organization such as the MTA in New York or even the TTC in Toronto can not simply build property on top of their substations and hope that money will flow in. It works in Hong Kong because of the (high) property tax that is instituted by the government, leading to (high) property rates across the SAR. Second, you are incorrect. The MTR’s subway/metro properties do NOT make money. They actually LOSE money. It is the entire organization that makes money. That is, it is their property development that helps subsidize its transit operations. The transit operations of MTR do NOT make money. Please be clear. Now I agree, the MTR as a whole is a unique system/business. But without aiming to make its transit operations profitable, it’s like a child saying, “Hey I got a C in Math,but an A in English. The A in English is more than needed to offset the C in Math”. I doubt any parent would like that very much. The MTR should aim to be profitable across all its operations, and not simply have one subsidize the other.

  3. Joe Molinaro
    Posted August 8, 2011 at 7:33 am | Permalink

    Eugene, I don’t understand your math. You say that MTR’s properties don’t make money, and MTR’s transit operations don’t make money, but the overall organization DOES make money. How can that be? Do they have some other source of revenue besides transit operations and property development?

  4. Eugene Chan
    Posted August 8, 2011 at 9:56 am | Permalink

    Hi Joe. Sorry for not being clear. MTR has two main divisions. One is transit (primarily the subway system in Hong Kong), and the other is property develop (shopping malls, condos around stations). The transit operations actually lose money. By how much — I don’t have that number on top of my head, but they do. I can go find the number for you if you want. It is the property operations that make money. In fact, the property operations of the MTR make so much money that the entire MTR company makes a profit. It needs to be understood that property prices are so high — yes, due to the limited geographic size of Hong Kong — but also because the Hong Kong SAR government puts a high sales price on properties. So when real estate companies (like MTR) buy land, they have to pay high prices, and they transfer those high prices onto the consumers. Thus, it is hard to say that the MTA should build shopping malls around New York subway stations since the economics are simply different.

  5. Eugene Chan
    Posted August 8, 2011 at 9:57 am | Permalink

    Now that the MTA shouldn’t build property around their stations. But what I actually mean is that they may make some money, but probably not a lot — certainly not as much as the MTR does from their property developments.

  6. Eugene Chan
    Posted August 8, 2011 at 9:58 am | Permalink

    Sorry. *Not that the MTA…

  7. A Bosch
    Posted August 9, 2011 at 11:21 am | Permalink

    @Eugene…you’re school grade analogy misses the point. You can’t separate the MTR into two separate halves because without one, the other would die as well. The property side may make money, but that’s only because people are willing to pay the higher taxs around the stations in exchage for the affordable and convenient transportation the transit side provides. Take away the transit and these properties become less desirable to occupy and arguably would not make money. Its a symbiotic relationship. The lesson US transit agencies can learn is how to copy that model. Most transit agencies are providing all the costs while private developers are reaping all the benefits.

  8. Posted August 10, 2011 at 11:59 am | Permalink

    The Hong Kong metro system is indeed fantastic, especially with signage in both Cantonese and English, making it easy for foreigners to use. We last rode it in 1993 when not overly crowded. Let us hope it does not reach the crowding levels of Mexico City’s system. On a more scholarly note, could some of the Hong Kong success be attributed to a lower rate of auto ownership and, or less use of autos? Although owning an elegant car is an important status symbol in Hong Kong, maybe the traffic situation discourages much use of it.

  9. Nic D.
    Posted August 10, 2011 at 2:02 pm | Permalink

    Unfortunately it is not so simple as Della Penna suggests: “Give it back to the private sector railroads … Doing both of these things will make passenger rail profitable again. ” As the author here repeatedly stated: “the government maintains a majority stake” in MTR. The problems with the railroads in the U.S. could have only be solved by regulations (not to mention that the gov’t subsidized the real railroads too — and some intra city trolleys as well).

    There has to be cooperation between public and private activities. Unfortunately, however, if this is not well structured, the private and public gains are very specific to a certain population (and the loses usually to the greater public).

    For analytical reasons, the business divisions could be separated. One loses money, the other doesn’t. But, the same way, they work together and help each other. One cannot say: if I were to count, the machines that make the bottles are profitable, while the section that makes the caps are not. The problem here is to understand comprehensively why the system works; including internal as well as external mechanisms.

  10. Posted August 13, 2011 at 9:48 am | Permalink

    Sorry Nic. I disagree—and the evidence is with me on this. Building a passenger rail system on the whims of Congress or worse—on the blessings of the apparatchiks within the Fed Rail Administration is NOT a recipe for success. It ran fine when it was recognized as a 3-legged stool. It ran fine with the private sector RRs running it under the 3 legs model. Passenger, mail, and expedited parcels.

    It ran fine like that until one small thing happened. A little thing that most people never noticed—the 100th anniversary of the contract between the RRs and the USPS.

    From 1860-1960, the RRs carried the mail. After 1960 the post office put the mail onto trucks who then took advantage of the coming super highways. This was the 1st leg of the stool.

    After the RRs lost the mail, they then got rid of the Railway Express Agency REA —the 2nd leg of the stool. That business model was then picked up and improved on by United Parcel Service who grew into the largest non-bulk customer of the RRs.

    So today if you are doddering along in an Amtrak Train [usually with obsolete equipment] — on track structure sculpted for freight and not for passenger operations— and coming the other way is a UPS container train; which one do you think waits in the passing siding for the other get thru. If you said that Amtrak waits for the UPS train, you’d be correct.

    Marrying up passenger, expedited parcels, and mail onto one train makes sense and I believe it certainly is the future.

    Pretending that a model dependent on Congress [especially w the crazy anarchists in the room] is simply not workable—in my humble opinion.

  11. Jackson Strong
    Posted August 14, 2011 at 7:14 pm | Permalink

    Very interesting article. Transportation is seen as something that is necessary for the government to provide, even through 100 years ago we had a far more extensive rail network that not only was not subsidized, but was taxed substantially primarily by means of property taxes.

    I strongly believe that transportation should not be subsidized. I know for a fact that far more advanced technologies exist for both road and rail, but have not been implemented primarily due to regulatory barriers, namely rights of way. For instance, there are several maglev companies, each with very different designs, that would happily bid to build maglev freight infrastructure along existing rights of way, such as highway easements, if given the opportunity.
    If we did not subsidize transportation, it would still have to be provided somehow. In a free enterprise system, resources would be allocated to the most efficient and productive form of transport.

  12. Bill Tirrill
    Posted August 15, 2011 at 10:38 pm | Permalink

    It’s amazing the extent to which these “free enterprise” bromides continue to be trotted out unchallenged. “In a free enterprise system, resources would be allocated to the most efficient and productive form of transport.” No–in a free enterprise system, resources are allocated where corporations, or entrepreneurs and their backers, see the best opportunity for growth, or profit. If this corresponds to efficiency or productivity, well and good, but this is only a part of the motivational picture.

    More to the point, there is likely to be little more than chance correlation between business motivation and the public good. Transportation infrastructure is a necessary public service, and as such needs to be made available with minimal consideration of users’ ability to pay. Try running that by a corporate boardroom.

    The right’s philosophy is consistent and complete. Howl that government can’t do anything as well as the private sector, and howl whenever government sticks its nose into anything that the private sector thinks might possibly be done profitably. Imagine someone bringing up the Hong Kong model in the House today, and you see the biggest problem this idea has.

  13. Posted August 16, 2011 at 4:45 am | Permalink

    I recall that when the San Francisco BART system was being considered the authorizing law stated specifically that BART could not use property for anything other than strictly transport related functions (e.g. parking lots). I believe that this was slightly changed, but BART’s options as a property developer are strictly limited and no where near the Hong Kong example. If it was pretty much impossible in the optimistic 1950s California to allow property development by public transport agencies, imagine how hard it would be now!